Economic Valuation of Environment: Overview Session objectives: List basic valuation methods Use valuation to analyze environmental issues

Agenda What is economic valuation? Why economic valuation Uses of economic valuation Total Economic Values Valuation Methods Examples Discussion

What is Economic Valuation? Assign value to changes in environment Subjective value, not objective value Value expressed by Willingness To Pay For ordinary goods, WTP=actual payments Environmental goods have no prices/markets, need special calculation Value expressed in money for comparison

Why value the environment? Estimate externalities for full-cost pricing MB - MC - environmental costs > 0 Compare net total benefits (NTB) of development and conservation projects, using the same resources NTBd vs. NTBc (in present values) Compare the total costs of different options for the same project, choose the least-cost option (project costs + environmental costs)

Typical Questions How to determine the total gains and losses of the mining industry? How to determine the total gains and losses of the mass tourism development? How to decide the use of forested land? Of 3 options of a water conservation project, which one to choose?

Uses of Economic Valuation Influence the selection of projects or choice of options Estimated values to be realized through application of economic instruments Cannot cover all values for all resources Social, cultural, political, and ecological factors also important for decision-making

Total Economic Value (TEV) Use Values Non-use Values direct use value indirect use value option value bequest value existence value Outputs directly consumable Food Biomass Recreation Health Future direct & indirect values Biodiversity Conserved habitats Use & non-use value of env’tal legacy Habitats Prevention of irreversible change Value from knowledge of continued existence Habitats Species Henetic Ecosystems Functional benefits: Flood control Storm protection Nutrient cycles S. Georgiou, et al, Economic Values and the Environment in the Developing World, UNEP 1997”,

Use of TEV Assume a forested land that can be used for agriculture or protected area: Without considering TEV, an agricultural project is feasible if TB - TC > 0 (in NPV) Considering TEV, the project is not feasible unless (TB-TC) - (TEV-TCcon) > 0 (in NPV)

Valuation Methods Doze-response Human capital Replacement cost Prevention cost Travel cost Hedonic pricing Benefit transfer Contingent valuation

Example: Korup National Park WWF conservation project & valuation analysis Value tropical rainforests to raise funds Assess potential changes in different functions of forests, use market prices or shadow prices to value Focus on use value of forests Non-use value = required external funds

Korup National Parks: Costs & Benefits Project costs of protected area: project expense -4475 commercial timber -353 forest products -223 Total costs -5,051 Project benefits of protected areas: forest products 354 tourism 680 fishery 1,770 flood control 265 land productivity 130 Total benefits 3,199 Net costs -1,852 (to be covered by external funds) Note: 1989 price, in millions CFA, discount rate 8%.